Contract Drafting

On a traditional design-bid-build project, the design professionals prepare the plans, the owner gives them to the contractor, and the contractor builds the project. So what happens when the plans are wrong?

[Disclaimer – this video contains profanity. Just giving you a heads up.]

The answer to that questions depends on where the project is located.

If the project is almost anywhere but Texas, then when the owner gives the plans to the contractor, there is an implied warranty by the owner that the plans are accurate and sufficient for construction of the project.

In Texas though, there is no implied warranty on behalf of the owner that the plans are accurate and sufficient when the plans are given to the contractor. Unless there is specific language in the contract saying that the owner warrants the accuracy of the plans, then the contractor must proceed at its own risk.

If the plans given to the contractor turn out to be incorrect, the contractor can submit Requests for Information seeking clarification. This may lead to delays, changes to the plans, and requests for change orders that the contractor did not anticipate at the time it submitted its bid or entered into the contract.

In this situation, a contractor may find itself facing schedule delays, and whether the contractor is entitled to an extension of time will be determined by the other provisions of the contract. In addition, the contractor may end up incurring significant additional costs that may or may not be recoverable based on the language of the contract.

So how can a contractor avoid a situation where incorrect plans have caused delays and damages that may or may not be recovered? I’m glad you asked.

The situation is avoided by addressing it in the contract and negotiating a resolution with the owner. This requires carefully reading the contract. There are a issues that are frequently seen in construction contracts that can impact the contractor’s rights with respect to incorrect plans.

Pay attention to contract provisions that address:

Whether the owner warrants the drawings and specifications;

The contractor’s responsibility for reviewing the plans and specifications for errors;

Whether the contractor is allowed to rely on the accuracy of information provided by the owner;

Whether the contractor is responsible for reviewing the site and satisfying itself as to whether the work can be constructed per the drawings and specifications; and

Whether the contractor is entitled to additional time or costs incurred due to incorrect plans.

Most likely, the contractor will discover that most (if not all) of the risk for errors in the plans have been shifted to the contractor.

If this is the case, then during the contract negotiation process the contractor can propose revisions to minimize this risk, including proposing language specifically stating that the owner warrants the accuracy of the plans and specifications. The owner may not accept the contractor’s proposed revisions, but it should at least provide an opportunity for both parties to discuss the risks associated with incorrect plans and find some resolution that both parties can live with.

Consider the following scenario. In a dispute between an owner and contractor, neither party can locate a copy of the signed construction contract in their files.

Without a signed contract, can the contractor still compel arbitration? As it turns out, in certain circumstances, yes.

In Ladymon v. Lewis, the court of appeals addressed this scenario. Some homeowners sued their builder, but no one could locate a signed version of the construction contract.

The builder filed a motion to compel arbitration. The first step, however, in compelling arbitration is to establish the existence of a valid arbitration agreement and show that the agreement covers the claims that have been asserted.

So how can you establish the existence of a valid arbitration agreement if you don’t have a copy of the signed contract? Well, like most things in a lawsuit, you make the best argument you can with what you have. So that’s what the builder did.

The builder submitted an affidavit that basically said: (i) we can’t find the signed version of the contract but here is an unsigned form contract; (ii) I remember signing this form contract when we built this home; and (iii) I remember getting a copy back from the homeowners with their signature.

Not the strongest evidence you would like supporting a motion to compel arbitration. Not surprisingly, the homeowners did not think the evidence was sufficient and filed their own affidavit saying that they did not remember signing any documents with the builder prior to construction except for financing documents.

The trial court denied the builder’s motion to compel arbitration and the builder appealed. On appeal, the builder argued that its affidavit established that there was a valid, enforceable arbitration agreement between the parties.

[T]he absence of a party’s signature does not necessarily destroy an otherwise valid contract. . .

And the court of appeals agreed. The court said:

[T]he absence of a party’s signature does not necessarily destroy an otherwise valid contract and is not dispositive of the question of whether the parties intended to be bound by the terms of a contract. If a contract is not signed by a party, thenother evidence may be used to establish the nonsignatory’s unconditional assent to be bound by the contract, including any arbitration provision.

The court of appeals said that the builder had sufficiently established the existence of a valid contract between the parties that contained an arbitration provision.

And what about the homeowners’ testimony that they did not recall signing the contract? The court of appeals basically said that saying you do not recall doing something is really no evidence at all.

So if you find yourself in a situation where you cannot locate a signed copy of a contract, all hope is not lost. Use what you have and make your best arguments. There’s a still a chance you can enforce an unsigned contract.

When I was (much) younger, I recall hearing a preacher in church one Sunday say (multiple times), “The road to hell is paved with folks with good intentions.”

I had no idea what he meant, but I was pretty sure it was bad. I want to borrow his words to describe something I’ve noticed about construction projects: The road to project hell is often paved with folks with good intentions.

In other words, the seeds of many construction disputes and unprofitable projects often begin with good intentions by the people involved.

At the beginning of the project, everyone has good intentions. I have never represented a client who started a project hoping there would be conflict.

I think most people want to trust the people they do business with (why would you do business with them if you didn’t trust them, right?). As a result, as a project moves along, participants discuss scope change, payment, pricing, and ordering materials, among other things.

Instructions are given and agreements are made. However, sometimes the parties do not diligently document the discussion and agreement.

This results in disagreements about what was discussed and agreed to once someone gets around to preparing a document, or worse, it leads to a surprise (some would call it ambush) claim at the end of the project.

Next comes payments being withheld, liens being filed, litigation or arbitration, people having to talk to their lawyer way more than they want to, and you find yourself in project hell.

You’ve probably heard the old saying, “trust but verify.” When it comes to a construction project, however, you should adopt the approach of:

Trust but Document.

Any time there is a discussion about any type of change or any kind of agreement is made, the main points should be documented immediately. Technology makes this more achievable than ever before.

Use Smartphones and Tablets

When a discussion takes place onsite, it can be documented quickly and easily with a smartphone or tablet.

Smartphones. Put the terms of a discussion and agreement in an email, which can be copied to all parties participating in the discussion so that they have a chance to speak up immediately if they disagree with any information in the email. If you don’t have time to type out an email (which should be rare), then use your smartphone to make a quick video or audio recording to record everyone agreeing on what was discussed and what actions will be taken. It would be very difficult for someone to later deny they agreed to something if you have them on video agreeing with the terms.

Tablets. Not only can you use a tablet to prepare a note or email, but certain tablets allow you to write with a stylus. This allows parties to quickly put the terms of their discussion or agreement in a document (even a prepared form stored on the tablet or in the cloud), and then sign it using it the stylus.

Once you have documented the main points of a discussion, the information can later be included in a change order proposal or change order. The suggestions above are not the only ways to use technology, but the point is that you should make technology work for you and decrease the number of potential disputes. TRUST BUT DOCUMENT. Because remember, the road to project hell is often paved with folks with good intentions.

I recently wrote about the WannaCry ransomware attack that crippled companies around the globe and recommended that cyberattacks be addressed in the force majeure provision of a construction contract.

Last week, there was another global cyberattack that was first believed to be another form of ransomware known as Petya, but it turned out that the attack was something more sinister.

Instead of being ransomware, which (usually) results in the victim getting their files and information back at a later date, experts have concluded that last week’s attack was actually malware that was a “wiper,” which prevents the user from ever accessing their files. In other words, a hacker that unleashes a “wiper” on a system is not trying to make money by demanding some type of ransom payment for the information – they just want to damage and destroy.

In addition to adding cyberattacks to the force majeure provision, you should also consider including a contractual provision addressing other potential remedies in the event of a cyberattack. For instance, parties may want to consider a termination provision that is triggered by a cyberattack.

Every project is different, so there is no “one size fits all” approach for addressing a cyberattack in a contractual provision, but here is a framework that you may be able to customize for your project:

Cyberattacks. The term “cyberattack” in this Contract shall mean, “an attempt by hackers to damage or destroy a Party’s computer network or system.” In addition to any other remedy available under the Contract (including any extension of time under Section _____), either Party may terminate the Contract upon _____ days written notice if either Owner or Contractor is the victim of a cyberattack that: (i) substantially deletes or destroys Owner’s or Contractor’s electronic files related to the Project such that Owner or Contractor are unable to continue performing their obligations under the Contract; or (ii) prevents Owner or Contractor from being able to access their electronic files related to the Project for more than _______ days. If Owner terminates the Contract under this Section _____, Contractor shall be entitled to recover (insert remedies, i.e., treated as termination for convenience, or payment to Contractor of a termination fee). If Contractor terminates the Contract under this Section _____, then Contractor shall (insert remedies, i.e., limited to payment for properly performed work, or payment to Owner of a termination fee).

Cybersecurity is an issue that is not going away. Whether you use a provision similar to the one above or draft your own provision, make sure you address the issue in your construction contracts.

Have you ever said: “I don’t have a contract with the architect yet. I only signed a proposal.”

I’ve heard this statement or something similar from clients multiple times over the years. They are usually surprised to find out, however, that if they signed a proposal then they already have a contract. Here’s some advice for owners and contractors: do not sign proposals from design professionals unless you have them reviewed by counsel!

Many design professional proposals contain unfavorable terms and conditions that result in an owner or contractor waiving important legal rights and remedies. For instance, proposals often contain provisions limiting the design professional’s liability or requiring the owner or contractor to indemnify the design professional from any claims. Also, proposals often exclude any mention of insurance or ownership of the work product.

Many times, Owners and contractors sign these proposals thinking that they are simply locking in a price for a scope of services, and that the parties will sign a more formal agreement later to establish other terms. But once a proposal is signed, the parties have a contract. At that point, the design professional may refuse to sign another agreement. And if problems arise later on, an owner or contractor may find they have very little recourse.

Let me share a real life story to illustrate my point. A general contractor’s work required the services of a geotechnical engineer for a new phase of a project, so one of the contractor’s project superintendents called the engineer to get pricing for the engineer’s services. The engineer faxed its pricing for the services on its standard proposal form (which included the engineer’s standard terms and conditions) to the job trailer. The superintendent signed and returned the proposal, and the engineer performed the services.

A few months after the project was complete, a large slab in an area of the project began to heave and crack, and ultimately had to be completely replaced. The cause – the geotechnical engineer’s negligence in performing its services. The cost of replacing the slab exceeded $1 million but the contractor’s efforts to recover that amount from the engineer were unsuccessful. Why? Because hidden within a paragraph of the engineer’s standard terms and conditions was language limiting the engineer’s liability to a very nominal amount.

Even though no one really contested that the damages were caused by the engineer’s negligence, the court enforced the limitation of liability provision, and the contractor and its carrier were the parties were stuck with the repair costs.

So the next time you get a proposal from a design professional, have it reviewed by a lawyer familiar with construction law who can appreciate the potential impact of any terms and conditions in the proposal. It may slow the process down slightly, but it will be worth it in the long run.

About This Blog

There are a lot of moving parts to a construction project. There is no standard “one size fits all” approach that applies to efforts to avoid or resolve the multitude of issues that can arise. The Toolbox is a publication by Dale Butler and Butler Law Firm, PC that provides thoughts on avoiding and resolving construction disputes. Butler Law Firm, PC is construction law firm located in the Dallas, Texas area that helps clients address construction related issues on a variety of projects. For more information on the firm, please visit butlerlegal.com.